Daily Commentary 09/03/15

• Better-than-expected US employment data to support USD Friday’s better-than-expected US employment data brought forward expectations of Fed tightening and kept the dollar rally going. Given the heavy snow in the US (again!), the market thought if anything the figure would be at the low end of expectations, instead it was outside the normal range on the upside. The weather would’ve made it easy to explain away a weak number, but there was no getting around such a strong one. The labor data seems to be a standout among US indicators – many of them are falling below expectations, but the labor data has fairly consistently beaten expectations. Given the importance of the labor data for the Fed, that’s what is moving the market. European indicators are consistently beating expectations while US indicators (aside from employment) are consistently missing expectations, but the dollar continues to rise and the euro continues to fall, because expectations about central bank policy are what’s moving markets.

• The report virtually sealed the case for a Fed rate hike this year, unless there’s a big change in circumstances. Longer-dated Fed funds futures rate expectations jumped 15 bps. San Francisco Fed President John Williams said “The time is coming when we’ll be making our first steps down the road to normalization” and that mid-year may be time for a “serious discussion” on the topic, while Richmond Fed President Jeffrey Lacker said June was “the leading candidate for liftoff.” Dallas Fed President Richard Fisher (a non-voter) was even more aggressive – he said he favors raising rates this month! Contrast that with the 21 central banks globally that have loosened policy so far this year and you can easily understand why the dollar gained against virtually all the currencies we track (except RUB) and, in my opinion, could rally further – and US stocks perhaps decline further?

• Commodities were hit by the combination of a stronger dollar and higher US interest rates. Gold and silver were down, while oil collapsed. Copper fell too as China’s copper imports plunged. Taking January and February together (to eliminate the effect of the Chinese New Year), imports are down 24% yoy. It’s no surprise then that NOK and NZD were the worst-performing G10 currencies from Friday morning, with AUD not far behind (lagging only behind EUR).

• Japan’s growth revised down sharply The final estimate of the nation’s Q4 GDP was revised down sharply to +1.5% qoq SAAR from +2.2%. The slow growth is particularly disappointing in that Q4 was when Japan emerged from the recession following the rise in the consumption tax in April last year. Private consumption was revised up a bit, but business spending actually fell for the third quarter in a row – not good when hoping for an export-led recovery. Apparently businesses cut investment and drew down their inventories. If companies are so hesitant to invest even when they have record holdings of cash, one wonders when they will be willing to pay higher wages.

• Separately, the nation’s current account surplus was about as expected in January on a seasonally adjusted basis. The trade deficit was narrower than expected so I assume the income surplus was also a bit smaller. The weaker yen is increasing the yen-denominated value of the income that Japan gets from its overseas investments, but over time as high-yielding bonds mature and are replaced by lower-yielding bonds, the income surplus seems destined to fall.

• Today’s highlights: In Switzerland, the Swiss National Bank will release its weekly sight deposits, which could reveal if the Bank intervened in the FX market in the week ended in March 6th. Deposits rose only slightly in the previous week as EURCHF kept fairly stable.

• From Canada, we get housing starts for February. After Friday’s sharp decline in Canada’s building permits for January, housing starts are likely to have been hurt in February. This could push USDCAD further up, and perhaps be the catalyst for the upside exit of the triangle formation that has been containing the price action since the beginnings of February. I still expect the rate to challenge 1.2800 in the not-too-distant future.

• The US releases the labor market conditions index for February. This is a monthly index that draws on a range of data to produce a single measure to gauge whether the labor market is on the whole improving. In January, the index came 4.9, so a reading above that, following the solid employment report on Friday, should add to signs of an improving labor market.

• During the European day, Minneapolis Fed President Narayana Kocherlakota and Cleveland Fed President Loretta Mester speak. Kocherlakota’s speech will be particularly important, as he is a well-known dove. In a speech in February, he argued that the Fed should not raise rates this year. If even he is now arguing in favor of tightening, then it’s pretty much a done deal. Mester on the other hand is on the hawkish end, so it will be no surprise if she argues in favor of tightening.

• As for the rest of the week, on Tuesday, during the Asian morning we get China’s CPI and PPI data for February. The forecast is for the CPI to have accelerated slightly, but the PPI rate to remain unchanged in deep deflationary territory. That could increase the pressure on PBOC to act again. On Wednesday, the spotlight will be on the Reserve Bank of New Zealand policy meeting. The Bank is expected to leave its policy rate unchanged at 3.5%. UK industrial production for January is forecast to have risen 0.3% mom after falling 0.2% mom in December. This would be the first rise after three consecutive months of declines and so could prove GBP-positive. On Thursday, Australia’s unemployment rate is forecast to have remained unchanged in February, while net employment is expected to rise. This could support the Aussie somewhat. In the US, headline retail sales for February are forecast to have rebounded after falling in January, while the core figure is forecast to have accelerated. The focus is usually on the core retail sales, which excludes auto and gasoline, thus the report could add to the greenback’s strength. Finally on Friday, the main event will be Canada’s employment report for February.

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